Klaviyo, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 63 Table of Contents The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this Annual Report on Form 10-K. As discussed in the section titled “Special Note Regarding Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included under Part I, Item 1A within this Annual Report on Form 10-K. This section of this Annual Report on Form 10-K discusses 2024 and 2023 items and year-to-year comparisons between 2024 and 2023. Discussions of 2022 items and year-to-year comparisons between 2023 and 2022 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on February 29, 2024, which is incorporated herein by reference. The period‑to‑period comparison of financial results is not necessarily indicative of future results. Overview We founded Klaviyo in 2012 to provide businesses of all sizes with powerful technology that captures, stores, analyzes, and predictively uses their own data to drive measurable, high-value outcomes. Klaviyo enables businesses to drive revenue growth by making it easy to bring their first-party data together and use it to create and deliver highly personalized consumer experiences across digital channels. Our platform combines our proprietary data and application layers into one vertically-integrated solution with advanced machine learning and artificial intelligence capabilities. This enables business users of any skill level to harness their data in order to send the right message at the right time across email, SMS, and push notifications, more accurately measure and predict performance, and deploy the specific actions and campaigns that drive the highest impact. Our reviews add-on allows our customers to collect product reviews within our platform to provide a seamless experience across the customer lifecycle, and our CDP offering gives customers user-friendly ways to track new types of data, transform and cleanse data, run more advanced reporting and predictive analysis to drive revenue growth, and sync data in to and out of Klaviyo at scale. We focused on marketing automation within eCommerce as our first application use case, and we believe our software is highly extensible across a broad range of functions and verticals. Today, our customers primarily operate within the retail and eCommerce vertical. Due to the flexibility and adaptability of our technology, we also see organic growth from customers in other verticals, such as education, events and entertainment, restaurants, and travel, as well as from B2B companies. As of December 31, 2024, our platform had efficiently scaled to over 167,000 customers. We generate revenue through the sale of subscriptions to our customers for the use of our platform. Our subscription plans are tiered based on the number of active consumer profiles stored on our platform and the number of emails and SMS messages sent. We currently permit our customers to send unlimited push notifications, which are included as part of our email subscription plan. Active consumer profiles are identified profiles that can be reached via at least one enabled marketing channel in Klaviyo; this means the profile is not suppressed, either by revoking consent or being rendered undeliverable. The vast majority of our subscription plans today are monthly. Our land-and-expand strategy aligns our success with that of our customers. As our customers’ businesses grow, they utilize more active consumer profiles and send more emails and SMS messages, which naturally increases their usage of our platform. Our revenue also expands when our customers add additional channels, such as SMS, and additional use cases, such as reviews and our CDP offering, or when their other brands, business units, and geographies start using our platform. 64 Table of Contents Factors Affecting Our Future Performance We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including the following factors: Growth in New Customers Attracting new customers to our platform is a key driver of our revenue growth strategy. We have successfully grown our retail and eCommerce customer base and believe we have significant room to expand within this vertical as well as expand into other industries, including education, events and entertainment, restaurants, wellness, and travel as well as from B2B companies. Our ability to attract new customers will depend on a number of factors, including our ability to innovate, the effectiveness and pricing of our new and existing products and capabilities, and the success of our selling and marketing efforts. Expansion of Revenue From Our Existing Customer Base We believe our product-led growth strategy enables us to efficiently expand penetration within our existing customer base. We focus on expansion in three primary ways. First, as our customers increase their usage of our platform through the number of active consumer profiles they store and email and SMS messages they send, they move to higher subscription tiers. Second, we cross-sell additional communication channels, such as SMS to customers who started on our platform with our email offering, as well as add-ons, such as reviews and our CDP offering. Finally, we offer our platform to our customers’ other brands, business units, and geographies. Going forward, our ability to increase sales to existing customers will depend on a number of factors, including our customers’ satisfaction with our solutions and the ability of our customers to attract new consumers. We expect these three forms of revenue expansion to continue in the future. Growth with Larger Customers When we first launched our platform, we intentionally focused on serving entrepreneurs and SMBs based on the need we saw for a simple and easy-to-use, yet powerful solution for customers in this category, and the large market opportunity within this group of customers. As our customers have scaled and become mid-market companies and larger enterprises themselves, their success with Klaviyo has attracted more interest from similarly sized businesses that are looking to drive better engagement with their consumers. Our ability to continue to move up-market is dependent on a number of factors, including our ability to further adapt our platform to the needs of larger accounts, the effectiveness of our sales team, and pricing. International Expansion We believe we have significant expansion opportunities in international markets. We started by serving customers in North America and, in 2019, we expanded our operations to London, England to penetrate the European region. In 2022, we opened our office in Sydney, Australia to capitalize on the opportunities in Asia Pacific. In 2024, we expanded our presence in the European region by adding operations in Dublin, Ireland. We have already experienced significant growth with international sales outside of the Americas accounting for 32.6% of our revenue for the year ended December 31, 2024. We also continue to expand our product offerings to better serve the international market. As of the date of this Annual Report on Form 10-K, we offer SMS capabilities in more than 15 countries, and we offer our platform in English, French, German, Portuguese, Korean, Spanish and Italian. We believe that the introduction of additional languages to our platform will increase our efficacy and ease of use in other regions. We also currently only bill in U.S. Dollars, and we believe that adding additional currencies to our platform will help us further our international expansion efforts. Investment in Innovation and Product Development Since our inception, we have been focused on product innovation, seeking to create what we believe is the best software solution for our customers. We originally launched our platform with email messaging as our first channel. Since 65 Table of Contents then, we have successfully added other channels, such as SMS and push notifications, as well additional use cases, such as reviews and our CDP offering. In 2024, we also launched Klaviyo AI, a suite of features that provide customers with AI-powered tools to streamline data segmentation, create and orchestrate campaigns, and drive better engagement. Our continued success depends on our ability to sustain product and technology innovation to continue delivering value to our customers. As technology and consumer preferences change, we believe that our ability to drive continuous product innovation will be critical to attract and retain customers and drive revenue growth. Increased Adoption of Our SMS Offering We have seen notable success in the expansion of our platform with our SMS offering, which launched in 2021. Once customers adopt our SMS offering, they typically grow their usage over time as they gain comfort and confidence in the new channel. Our SMS offering has higher associated communication sending costs, and as the number of SMS messages sent by our customers increases, we expect our gross margin to decline modestly. SMS messaging is particularly concentrated in the fourth quarter of each year due to the holiday shopping season, resulting in our gross margin being most heavily impacted in that quarter. This gross margin impact could be partially offset by our continued work on data storage architecture and gaining further leverage on costs with our increased scale. We believe we will see our overall gross profit dollars increase as customers send more SMS messages if our SMS offering continues to gain traction. Expansion into New Industry Verticals and Use Cases As more customers use our platform, we are seeing organic growth from customers in other verticals, such as education, events and entertainment, restaurants, and travel, as well as from B2B companies. While we started with consumer engagement as our initial use case in the retail and eCommerce vertical, we see a large opportunity into other products and verticals. Without an active sales motion, we have attracted customers from verticals other than retail and eCommerce, which indicates the strong interest and applicability of our platform to new verticals. We continue to explore ways to serve these new verticals more intentionally. In the future, we intend to more actively invest in addressing new industry verticals and product use cases. Key Performance Metrics Customers . We define a customer as a distinct paid subscription to our platform. A single organization could have multiple discrete contracting divisions or subsidiaries or brands each with paid subscriptions to our platform, which would, in general, constitute multiple distinct customers. In some cases, at the customer’s request, we allow subscriptions under the same parent organization to be consolidated into a single paid subscription in which case such consolidated paid subscriptions would constitute a single customer. We measure our total number of customers as a point-in-time calculation measured as of the end of a particular period. Customers do not include persons or entities that use our platform on a free trial basis. Customers Generating Over $50,000 of ARR . We calculate our number of customers generating over $50,000 of ARR (as defined below) as those customers that have an average ARR of greater than $50,000 over the prior twelve months (or the entire duration of the customer’s paying relationship, if it is less than twelve months) as of the date of determination. We believe the number of customers generating over $50,000 of ARR is a key performance metric to help investors and others understand and evaluate our results of operations in the same manner as our management team, as it is an indicator of our ability to grow the number of customers that are exceeding this ARR threshold, both from our existing customers expanding their usage of our platform and from our sales to larger customers. We believe this is an important indicator of our ability to continue to successfully move up-market. As of December 31, 2024, we had 2,850 customers generating over $50,000 of ARR, compared to 1,958 customers generating over $50,000 of ARR as of December 31, 2023, representing growth of 46% year-over-year. Dollar-Based Net Revenue Retention Rate. We calculate our Dollar-Based Net Revenue Retention rate (“NRR”) by first identifying the cohort of customers as of twelve months prior to the date of determination. We then calculate the 66 Table of Contents Annualized Recurring Revenue (“ARR”) from this customer cohort as of twelve months prior to the date of determination (the “Prior Period ARR”) and the ARR from this customer cohort as of the date of determination (the “Current Period ARR”). ARR, for any date of determination, is the annualized value of existing paid subscriptions, which we calculate by taking the amount of revenue that we expect to receive in the next monthly period for our existing paid subscriptions, assuming no changes to such subscriptions in the next month, as of that date of determination, and multiplying that amount by twelve. Current Period ARR includes any expansion, price increases, and customer subscriptions that are deactivated and subsequently reactivated during the applicable twelve-month period and reflects contraction or attrition over the last twelve months from this customer cohort, but excludes any ARR from new customers in the current period. We then divide the total Current Period ARR by the total Prior Period ARR to arrive at the point-in-time NRR. We then calculate the weighted average point-in-time NRR as of the last day of each month in the current trailing twelve-month period to arrive at the NRR, with the weightings determined by the total ARR at the end of each period. We believe NRR is a key performance metric to help investors and others understand and evaluate our results of operations in the same manner as our management team, as it represents the expansion in usage of our platform by our existing customers, which is an important measure of the health of our business and future growth prospects. We measure Dollar-Based Net Revenue Retention Rate to measure this growth. As of December 31, 2024 and 2023, our NRR was 108% and 117%, respectively. We implemented a price increase in September 2022, which positively increased revenue growth in 2023. This price increase also impacted the various measures we use to assess our usage and subscription levels based on revenue, such as NRR and our revenue growth rate, and following its implementation, those measures experienced corresponding increases as a result. The decrease in these measures from December 31, 2023 to December 31, 2024 was largely driven by lapping the one year anniversary of this price increase in September 2023. Klaviyo Attributed Value. We define Klaviyo Attributed Value (“KAV”) as the amount of revenue our customers generated through orders placed by consumers within a specified period of time after a message is sent using our platform, which in the case of email is five days from when the message is sent, and in the case of SMS is twenty-four hours from when the message is sent. For email, the message also needs to be opened or clicked in order for the transaction to fall within our definition. KAV excludes orders placed with customers that do not opt-in to sharing data on placed orders, orders for which we cannot determine the currency or value, or unusual orders that appear to us to be anomalies. Since our definition of a customer does not include persons or entities that use our platform on a free trial basis, any revenue generated through orders placed with these persons or entities is also excluded from our definition of KAV. We do not net chargebacks or sales refunds from our calculation of KAV. If a customer leaves Klaviyo, we stop counting that customer’s KAV after their last contracted month. We believe KAV serves as a measure of the return-on-investment that we help generate for our customers and illustrates the value our platform can drive to our customers, which we believe enhances our ability to maintain existing customers and attract new customers. We use KAV as an internal estimate to track the value we drive to customers through our platform. KAV is an operational measure, does not represent revenue earned by us, and does not directly correlate to our pricing, revenue, or results of operations. Further, KAV is not a forecast of future revenue and investors should not place undue reliance on KAV as an indicator of our future or expected results. Seasonality Generally, demand for our services increases during the fourth quarter as our customers run more marketing campaigns and deploy marketing spend as a result of increased consumer spending patterns during the holiday shopping season. This is specifically prominent within the retail and eCommerce sector in which the majority of our customers operate today. Given our revenue model allows our customers to scale usage as needed, our sequential revenue growth has been historically stronger in the fourth quarter of each year compared to the revenue growth we see in other quarters. Our customers utilize the SMS offering in particular during the holidays; as such, to the extent that the SMS offering grows in proportion to our other channels, we expect that we would see further seasonality. We believe seasonality may continue to impact our quarterly results going forward. 67 Table of Contents Components of Results of Operations Revenue A significant majority of our revenues are derived from sales of subscriptions, which are comprised of fees paid by customers to access our cloud-based software platform for storing first-party consumer data and using it to create and deliver personalized and targeted consumer experiences across digital channels. A small portion of our revenue is currently derived from professional services. For more information on how we recognize our revenues, see Note 2. Summary of Significant Accounting Policies within the Notes to the Consolidated Financial Statements. Cost of Revenue Our cost of revenue primarily consists of cloud-based infrastructure costs, outbound communication sending costs, employee-related costs including payroll, benefits, bonuses, and stock-based compensation expense related to our customer support team, amortization of capitalized internal-use software development costs, and allocated overhead costs, including rent, facilities, depreciation, and costs related to information technology. We expect our cost of revenue to increase in dollar amount as we continue to invest in our platform infrastructure and support, acquire new customers, and drive existing customers to expand their usage of our platform. Gross Profit Our gross profit represents revenue, less all cost of revenue. We expect our gross profit to increase over time due to an increase in revenue. We expect our gross margin to decline modestly in the near term as the volume of SMS messages sent through our platform increases, and it could fluctuate in the long term due to timing of investments and expected increases in our cloud-based infrastructure costs and outbound communication sending costs, including email and SMS, as our customers increase usage of our platform and capabilities. We expect to continue to optimize inputs to our cost of revenue through continued work on data storage architecture and gaining further leverage on costs with our increased scale. Selling and Marketing Our selling and marketing costs primarily consist of employee-related costs including payroll, benefits, bonuses, and stock-based compensation; sales commissions and partnership expenses for revenue sharing agreements, including to Shopify, other commerce platform partners, and agency partners; costs associated with advertising and marketing activities; and allocated overhead costs, including rent, facilities, depreciation, and costs related to information technology. Sales commissions are considered an incremental cost to obtain contracts with customers and these costs are deferred and amortized over the expected benefit period. On July 28, 2022, we entered into a collaboration agreement and strategic partnership with Shopify pursuant to which we issued warrants to Shopify (the “Shopify Warrants”), in exchange for promotion of our marketing services with customers within the Shopify ecosystem. In accordance with relevant accounting policies, we recognize a prepaid marketing expense in connection with vesting of the Shopify Warrants. This prepaid marketing expense represents the probable future economic benefit being amortized over a seven-year expected benefit period and is recorded based on the fair value of the warrants on the grant date. We expect to continue to make investments in our selling and marketing organization, and expect selling and marketing expense to remain our largest operating expense in dollar amount. Selling and marketing expense may fluctuate from period to period depending on the extent and timing of our marketing initiatives. We expect selling and marketing expense to increase in dollar amount but decrease as a percentage of revenue over the longer term. In the short term, we expect selling and marketing costs to increase as we increase headcount in our go-to-market team, grow into new markets, and pay more in partnership fees to Shopify and other partners as we continue to grow. 68 Table of Contents Research and Development Our research and development costs primarily consist of employee-related costs associated with research and development staff, including payroll, benefits, bonuses, stock-based compensation, and allocated overhead costs, including rent, facilities, depreciation, and costs related to information technology. We capitalize a portion of our research and development costs that meet the criteria for capitalization of internal-use software. All other research and development costs are expensed as incurred. We believe continued investment and innovation in our platform, capabilities, and offerings are important for our growth and, as such, expect our research and development costs to continue to increase in dollar amount but remain consistent as a percentage of revenue for the foreseeable future. This percentage may fluctuate from period to period depending on the timing and amount of these expenses. General and Administrative Our general and administrative expenses consist of employee-related costs including payroll, benefits, bonuses, and stock-based compensation in general corporate functions, such as procurement, accounting and finance, tax, legal, project management, and human resources, as well as allocated overhead costs, including rent, facilities, depreciation, and costs related to information technology. Credit card processing fees are also part of general and administrative expenses. We expect general and administrative expenses to increase in the near term as a result of operating as a public company, including expenses associated with compliance with the rules and regulations governing public companies, such as Section 404 of the Sarbanes-Oxley Act, and an increase in legal, audit, insurance, investor relations, professional services and other administrative expenses. Further, we expect an increase in dollar amount of credit card processing fees in line with the expected increase in revenue for the foreseeable future. As a result, we expect our general and administrative expenses to increase in dollar amount for the foreseeable future but to generally decrease as a percentage of our revenue over the longer term as we scale our business. This percentage may fluctuate from period to period depending on the timing and amount of our general and administrative expenses, including in the short term due to heightened compliance requirements associated with operating as a public company. These expenses include increased professional service costs, the increased cost of directors’ and officers’ liability insurance, and costs associated with increasing our employee headcount in certain departments, such as accounting, internal audit, and investor relations. Interest Income Interest income consists of income earned from our cash deposits held in interest-bearing accounts and money market funds. Provision for Income Taxes Provision for income taxes consists primarily of income taxes related to U.S. and foreign jurisdictions in which we conduct business. We maintain a full valuation allowance on our U.S. federal and state net deferred tax assets as we have concluded that it is not more likely than not that the deferred tax assets will be realized. The OECD is coordinating negotiations among more than 140 countries with the goal of achieving consensus around substantial changes to international tax policies, including the implementation of a minimum global effective tax rate of 15%. Various countries have implemented or are in the process of implementing the legislation, which does not currently apply to us. As additional jurisdictions enact such legislation, we expect our effective tax rate and cash tax payments could increase in future years. 69 Table of Contents Segments We operate our business through one reportable segment, as well as one business activity, providing software that brings first-party consumer data together and uses it to create and deliver highly personalized consumer experiences across digital channels. Results of Operations The following tables set forth our results of operations for the fiscal years presented and express the relationship of certain line items as a percentage of revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results. Year Ended December 31, 2024 2023 2022 ($ in thousands) Consolidated Statements of Operations Revenue $ 937,464 $ 698,099 $ 472,748 Cost of revenue (1) 221,305 177,888 128,025 Gross profit 716,159 520,211 344,723 Operating expenses: Selling and marketing (1) 404,209 394,369 213,848 Research and development (1) 238,459 262,177 104,077 General and administrative (1) 157,569 194,287 81,834 Total operating expenses 800,237 850,833 399,759 Operating loss (84,078) (330,622) (55,036) Other income (expense): Other income (expense), net 816 (470) 388 Interest income 39,582 24,051 5,538 Total other income (expense), net 40,398 23,581 5,926 Loss before income taxes (43,680) (307,041) (49,110) Provision for income taxes 2,462 1,192 83 Net loss $ (46,142) $ (308,233) $ (49,193) (1) Includes stock-based compensation expense as follows (in thousands): Year Ended December 31, 2024 2023 2022 Cost of revenue $ 8,917 $ 24,973 $ 129 Selling and marketing 40,907 107,954 985 Research and development 50,693 120,184 1,230 General and administrative 34,695 87,688 5,958 Stock-based compensation, net of amounts capitalized 135,212 340,799 8,302 Capitalized stock-based compensation expense 3,555 1,349 — Total stock-based compensation expense $ 138,767 $ 342,148 $ 8,302 70 Table of Contents The following table sets forth our consolidated statements of operations data expressed as a percentage of revenue: Year Ended December 31, 2024 2023 2022 Consolidated Statements of Operations Revenue 100.0 % 100.0 % 100.0 % Cost of revenue 23.6 25.5 27.1 Gross profit 76.4 74.5 72.9 Operating expenses: Selling and marketing 43.1 56.5 45.2 Research and development 25.4 37.6 22.0 General and administrative 16.8 27.8 17.3 Total operating expenses 85.3 121.9 84.6 Operating income (loss) (8.9) (47.4) (11.6) Other income (expense): Other income (expense), net 0.1 (0.1) 0.1 Interest income 4.2 3.4 1.2 Total other income (expense), net 4.3 3.3 1.3 Income (loss) before income taxes (4.6) (44.0) (10.4) Provision for income taxes 0.3 0.2 — Net loss (4.9) % (44.2) % (10.4) % Comparison of the Years Ended December 31, 2024 and 2023 Revenue Year Ended December 31, 2024 2023 $ Change % Change ($ in thousands) Revenue $ 937,464 $ 698,099 $ 239,365 34.3 % Revenue for the year ended December 31, 2024 increased by $239.4 million or 34.3%, to $937.5 million compared to $698.1 million for the year ended December 31, 2023. The increase was primarily due to expansion with existing customers driven by expanded usage of our platform as well as our SMS channel. For the year ended December 31, 2024, sales to existing customers accounted for approximately 54% of the increase in revenue while approximately 46% of the increase in revenue was related to new customers, particularly in the mid-market and outside of the Americas. Sales to new customers represent the revenue recognized from new customers acquired in the 12 months prior to the period end. Cost of Revenue Year Ended December 31, 2024 2023 $ Change % Change ($ in thousands) Cost of revenue $ 221,305 $ 177,888 $ 43,417 24.4 % Cost of revenue for the year ended December 31, 2024 increased by $43.4 million or 24.4%, to $221.3 million compared to $177.9 million for the year ended December 31, 2023. This increase was primarily due to an increase of $24.5 million in cloud-based infrastructure costs, $24.2 million in outbound communication sending costs on behalf of our customers, $8.6 million in salaries and personnel expenses as a result of increases in headcount, and $2.8 million in 71 Table of Contents amortization related to capitalized software development costs. The increase was offset by a decrease of approximately $16.1 million in stock-based compensation expense related to the vesting of restricted stock units (“RSUs”) in connection with our IPO in September 2023. Gross Profit Year Ended December 31, 2024 2023 $ Change % Change ($ in thousands) Gross profit $ 716,159 $ 520,211 $ 195,948 37.7 % Gross profit for the year ended December 31, 2024 increased by $195.9 million or 37.7%, to $716.2 million compared to $520.2 million for the year ended December 31, 2023. This increase was primarily due to revenue growth and a decrease in stock-based compensation expense. Selling and Marketing Year Ended December 31, 2024 2023 $ Change % Change ($ in thousands) Selling and marketing $ 404,209 $ 394,369 $ 9,840 2.5 % Selling and marketing expenses for the year ended December 31, 2024 increased by $9.8 million or 2.5%, to $404.2 million compared to $394.4 million for the year ended December 31, 2023. This increase was primarily due to an increase of approximately $51.7 million in salaries and personnel expenses as a result of increases in headcount and the introduction of a company-wide bonus program, $12.7 million in marketing related services, $10.2 million in partnership-related expenses across our ecosystem, and $3.7 million in technology expenses. The increase was offset by a decrease of approximately $67.0 million in stock-based compensation expense related to the vesting of RSUs in connection with our IPO in September 2023 and $2.1 million in restructuring expenses. Research and Development Year Ended December 31, 2024 2023 $ Change % Change ($ in thousands) Research and development $ 238,459 $ 262,177 $ (23,718) (9.0) % Research and development costs for the year ended December 31, 2024 decreased by $23.7 million or 9.0%, to $238.5 million compared to $262.2 million for the year ended December 31, 2023. This decrease was primarily due to a decrease of approximately $69.5 million in stock-based compensation expense related to the vesting of RSUs in connection with our IPO in September 2023 and $2.6 million in restructuring expenses. The decrease was offset by an increase of approximately $42.2 million in salaries and related personnel expenses as a result of increases in headcount and the introduction of a company-wide bonus program, $4.5 million in technology expenses, and $1.2 million in professional services. General and Administrative Year Ended December 31, 2024 2023 $ Change % Change ($ in thousands) General and administrative $ 157,569 $ 194,287 $ (36,718) (18.9) % 72 Table of Contents General and administrative expenses for the year ended December 31, 2024 decreased by $36.7 million or 18.9%, to $157.6 million compared to $194.3 million for the year ended December 31, 2023. This decrease was primarily due to a decrease of approximately $53.0 million in stock-based compensation expense related to the vesting of RSUs in connection with our IPO in September 2023 and a $6.1 million release in reserves due to tax filings in international jurisdictions. The decrease was offset by an increase of approximately $10.4 million in salaries and personnel expenses as a result of increases in headcount and the introduction of a company-wide bonus program, $6.6 million in payment processing fees, $3.6 million in professional expenses, primarily attributed to expenses incurred to operate as a public company, and $2.2 million in technology expenses, primarily attributed to an increase in licenses as a result of the aforementioned increases in headcount. Other Income Year Ended December 31, 2024 2023 $ Change % Change ($ in thousands) Other income (expense), net $ 816 $ (470) $ 1,286 (273.6) % Other income for the year ended December 31, 2024 increased by $1.3 million or 273.6%, to $0.8 million compared to $(0.5) million for the year ended December 31, 2023. This increase was primarily due to favorable foreign exchange fluctuations. Interest Income Year Ended December 31, 2024 2023 $ Change % Change ($ in thousands) Interest income $ 39,582 $ 24,051 $ 15,531 64.6 % Interest income for the year ended December 31, 2024 increased by $15.5 million or 64.6%, to $39.6 million compared to $24.1 million for the year ended December 31, 2023. This increase was primarily due to an increase in interest rates, greater cash balances due to our IPO, and the volume of newly opened interest-bearing accounts, including money market funds, as part of our diversified cash management strategy. 73 Table of Contents Provision for Income Taxes Year Ended December 31, 2024 2023 $ Change % Change ($ in thousands) Provision for income taxes $ 2,462 $ 1,192 $ 1,270 106.5 % Income tax expense for the year ended December 31, 2024 increased by $1.3 million or 106.5% to $2.5 million compared to $1.2 million for the year ended December 31, 2023. The increase was primarily due to the increase in profits before taxes in our international entities and an increase in our U.S. taxable income. Liquidity and Capital Resources We assess our liquidity in terms of our ability to generate cash to fund our operating, investing, and financing activities. In doing so, we review and analyze our primary sources and uses of liquidity to include cash balances on hand and cash flows from operations. Since our inception through December 31, 2024, we have financed our operations primarily through sales of equity securities and payments received from our customers. In September 2023, we completed our IPO, which resulted in aggregate cash proceeds of approximately $320.1 million, after deducting approximately $17.7 million in underwriting discounts and commissions and $7.4 million in offering-related expenses. As of December 31, 2024, our principal sources of liquidity included cash, cash equivalents, and restricted cash totaling $882.6 million, with such amounts held for working capital purposes. Our cash equivalents were comprised of $278.2 million in money market funds. Our primary cash needs are for personnel-related expenses, selling and marketing expenses, and third-party cloud infrastructure expenses. Based upon our current levels of operations, we believe our operating cash flows provide sufficient liquidity to support liquidity and financing needs for at least the next twelve months. Our ability to continue to meet these requirements and obligations will depend on, among other things, our ability to achieve anticipated levels of revenue and cash flow from operations, and our ability to manage costs and working capital successfully. Additionally, our cash flow generation ability is subject to general economic, financial, competitive, legislative, and regulatory factors, and other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations in an amount sufficient to enable us to fund our liquidity needs. The following table sets forth, for the periods indicated, our working capital: 74 Table of Contents As of December 31, 2024 2023 ($ in thousands) Cash $ 881,473 $ 738,562 Restricted cash, current (1) 375 409 Accounts receivable, net of allowance for doubtful accounts 43,095 23,076 Deferred contract acquisition costs 20,544 15,198 Prepaid expenses and other current assets 34,262 26,244 Accounts payable 14,579 13,597 Accrued expenses 99,828 62,838 Operating lease liabilities 20,989 14,081 Deferred revenue 64,497 40,100 Total Working Capital $ 779,856 $ 672,873 ______________ (1) Restricted cash related to our required collateral to fund payroll and credit card obligations in our Australia entity. Working capital consists of current assets (including cash, current portion of restricted cash, accounts receivable, current deferred contract acquisition costs, current prepaid expenses and other current assets), less current liabilities (including accounts payable, accrued expenses, current lease liabilities, and deferred revenue, all of which is current). Statement of Cash Flows The following table sets forth, for the periods indicated, our beginning balance of cash, net cash flows provided by operating, investing and financing activities, and our ending balance of cash. For additional detail, see our consolidated financial statements and the accompanying notes thereto included elsewhere in this Annual Report on Form 10-K. Year Ended December 31, 2024 2023 ($ in thousands) Net cash provided by (used in) Operating activities $ 165,955 $ 119,371 Investing activities (17,226) (9,358) Financing activities (5,799) 242,728 Net increase in cash, cash equivalents, and restricted cash $ 142,930 $ 352,741 Cash, cash equivalents, and restricted cash, beginning of period 739,657 386,916 Cash, cash equivalents, and restricted cash, end of period $ 882,587 $ 739,657 Operating Activities Net cash provided by operating activities of $166.0 million for the year ended December 31, 2024 was primarily attributable to a net loss of $46.1 million adjusted for non-cash charges of $239.8 million and net cash outflows of $27.7 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $135.2 million of stock-based compensation expense, $52.9 million of prepaid marketing expense amortization, $19.8 million of deferred contract acquisition cost amortization, $17.7 million of depreciation and amortization expense, and $12.7 million of operating lease costs. Net cash outflows from changes in operating assets and liabilities primarily consisted of a $34.4 million increase in deferred contract acquisition costs related to increase in 75 Table of Contents sales commissions resulting from our increase in revenues, a $20.8 million increase in accounts receivable due to an increase in customer billings, a $17.3 million increase in prepaid expenses and other noncurrent assets, and a $16.7 million decrease in operating lease liabilities due to payments related to our operating lease obligations. The cash outflow was offset by cash inflows primarily from a $36.3 million net increase in accrued expenses and accounts payable due to timing of vendor payments and introduction of the company-wide bonus program and a $24.4 million increase in deferred revenue resulting from increased billings for subscriptions. Net cash provided by operating activities of $119.4 million for the year ended December 31, 2023 was primarily attributable to a net loss of $308.2 million adjusted for non-cash charges of $433.5 million and net cash outflows of $5.9 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $340.8 million of stock-based compensation expense, $52.9 million of prepaid marketing expense amortization, $15.8 million of deferred contract acquisition cost amortization, $13.7 million of depreciation and amortization expense, and $13.0 million of operating lease costs. Net cash outflows from changes in operating assets and liabilities primarily consisted of a $26.9 million increase in deferred contract acquisition costs related to increase in sales commissions resulting from our increase in revenues, a $15.2 million decrease in operating lease liabilities due to payments related to our operating lease obligations, and a $12.9 million increase in accounts receivable due to an increase in customer billings. The cash outflow was offset by cash inflows primarily from a $31.2 million net increase in accrued expenses and accounts payable due to timing of vendor payments and the implementation of a company-wide sabbatical program and a $15.0 million increase in deferred revenue resulting from increased billings for subscriptions. Investing Activities Net cash used in investing activities of $17.2 million for the year ended December 31, 2024 consisted of $11.3 million of capitalized software costs and $5.9 million purchases of property and equipment. Net cash used in investing activities of $9.4 million for the year ended December 31, 2023 consisted of $5.7 million of capitalized software costs and $3.7 million purchases of property and equipment. Financing Activities Net cash used in financing activities of $5.8 million for the year ended December 31, 2024 primarily consisted of approximately $23.7 million used for the payment of employee tax obligations related to the vesting of stock-based compensation awards offset by $9.7 million of proceeds from the exercise of stock options and $8.1 million of proceeds from the employee stock purchase plan. Net cash provided by financing activities of $242.7 million for the year ended December 31, 2023 primarily consisted of approximately $320.1 million of our IPO proceeds net of issuance costs and $4.2 million of proceeds from the exercise of common stock options offset by $81.6 million used for the payment of employee tax obligations related to the net share settlement of stock-based compensation awards. Cash Management We manage our operating cash management activities through banking relationships with our domestic and international subsidiaries and all of our cash requirements were serviced by the operating cash flows of our business. We diversify our cash deposits across a variety of well-established financial institutions based on ratings from nationally recognized rating organizations to reduce our exposure to counterparty and concentration risk. We expect a continued increase in our cash balances as our business continues to grow. We expect to continue to diversify our cash management strategy to primarily include money market funds, highly-liquid debt instruments 76 Table of Contents of the U.S. government and its agencies, senior corporate bonds, and commercial paper to reduce our global exposure on banking deposits. Lease Obligations We enter into various noncancellable lease agreements for certain office space and equipment used in the normal course of business. Our noncancellable lease obligations as of December 31, 2024 were $57.2 million, with $21.5 million payable within 12 months. Other Contractual Obligations We enter into various noncancellable agreements with marketing vendors and various service providers. Our noncancellable obligations as of December 31, 2024 were $225.5 million, with $102.5 million payable within 12 months. Critical Accounting Estimates Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements included elsewhere in this filing, which have been prepared in accordance with GAAP. In preparing the consolidated financial statements, we make estimates and judgements that affect the reported amounts in the consolidated financial statements and related footnote disclosures included elsewhere in this filing. Our estimates are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We re-evaluate our estimates on an ongoing basis. The accounting estimates we use in the preparation of our consolidated financial statements will change as new events occur, more experience is acquired, additional information is obtained and our operating environment changes. Changes in estimates are made when circumstances warrant. Such changes in estimates and refinements in estimation methodologies are reflected in our reported results of operations and, if material, the effects of changes in estimates are disclosed in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty and actual results could differ materially from the amounts reported based on these estimates. The critical accounting estimates that reflect our more significant judgments and estimates used in the preparation of our consolidated financial statements included elsewhere in this filing include those noted below. Revenue Recognition We derive revenue from subscription fees and other related professional services. Revenue is recognized when, or as, the performance obligation is satisfied by transferring the control of the promised service to a customer. The amount of revenue recognized reflects the consideration that we expect to be entitled to receive in exchange for these services. Our SaaS subscription agreements with customers offer personalized email and SMS marketing services through a cloud-based software platform, as well as add-ons, such as reviews and our CDP offering. Subscription fees are generated from customers accessing our hosted platform services and our subscription agreements do not provide our customers with the right to take possession of our software. Contractual subscriptions for customers generally auto-renew on either a monthly, quarterly, or annual basis, and customers may elect not to renew by providing at least five days’ advance notice for contracts on a monthly billing cycle and thirty days’ advance notice for contracts with any other billing cycles. Subscription pricing is determined based on a customer’s profile count and monthly messaging quantities based on a tiered pricing structure and is considered fixed. Variable consideration 77 Table of Contents in our contracts is not material but represents the overage charges incurred by customers who exceed their allotments. We recognize revenue under the core principle to depict the transfer of control to our customers in an amount reflecting the consideration to which we expect to be entitled. We account for individual performance obligations separately if they have been determined to be distinct and we allocate the transaction price to the distinct performance obligations on a relative stand-alone selling price basis. The determination of stand-alone selling price uses judgments and estimates that are based upon the prices at which we separately sell subscriptions. If not considered distinct, the goods or services promised by us are combined and accounted for as a combined performance obligation. Determining the distinct performance obligations in a contract requires judgment. Typically, our SaaS subscription agreements consist of a single performance obligation, and revenue is recognized over time as the performance obligation is satisfied. Our single performance obligation primarily consists of access to our platform and professional services. Costs to Obtain Customers We capitalize incremental costs of obtaining revenue contracts, which primarily consist of sales commissions. Contract costs are amortized on a straight-line basis over a period of up to five years, which reflects the expected period of benefit of the performance obligation and may be longer than the initial contract period. We determine the estimated benefit period by considering both qualitative and quantitative factors, including the length of the subscription terms in our customer contracts and the anticipated life of our technology, among other factors. Shopify Collaboration Agreement We entered into a collaboration agreement on July 28, 2022 with Shopify to form a strategic relationship for the purposes of creating greater interoperability between the Klaviyo and Shopify platforms. In connection with the collaboration agreement, we entered into three separate agreements, including a revenue sharing agreement, common stock warrant agreement, and stock purchase agreement. The revenue sharing agreement was entered into in connection with, and the Shopify Warrants were issued in exchange for, compensation for marketing services that we will receive from Shopify under the collaboration agreement. We have estimated the fair value of the Shopify Warrants on the date of issuance using the Black-Scholes option pricing model. The Black-Scholes option pricing model uses assumptions that are based upon estimates made by management. The key assumptions used to value the Shopify Warrants include the fair value of the common stock, a dividend yield of zero, contractual term of 10 years, volatility of 55.00%, and a risk-free rate of 2.85%. We estimate the volatility based upon an average historical volatility of several peer public companies over a period equivalent to the term of the Shopify Warrants. The risk-free interest rate is based on the United States Treasury yield curve in effect at the time of grant for time periods approximately equal to the expected term of the Shopify Warrants. Expected dividend yield is 0.0% as we have not paid and do not anticipate paying dividends on our common stock. We recognize a prepaid marketing expense asset associated with the Shopify Warrants over a straight-line five-year vesting period. Pursuant to the common stock warrant agreement, upon our IPO, 25% of the total number of warrants were accelerated, and the remaining unvested portion vests quarterly over the remaining vesting term. The prepaid marketing expense asset is amortized into selling and marketing expense on a straight-line basis over the expected benefit period, which we determine to be the seven-year term of the collaboration agreement as the core activities and deliverables of the collaboration agreement will remain in place for seven years and Shopify does not have the right to terminate the collaboration agreement for convenience. Under the stock purchase agreement, we issued and sold shares of common stock to Shopify and provided an investment option which allows Shopify to purchase additional shares of common stock at a fixed price, exercisable 78 Table of Contents at any time at Shopify’s option until July 28, 2030. We determined that the purchase price equals the fair market value of the instruments issued as Shopify was an outside investor at the time we entered into the stock purchase agreement and the purchase represented an arms-length transaction. Further, the fair value of the instruments was substantiated through a probability weighted expected return method analysis as part of common stock valuations performed at the time the agreement was entered into. The common stock and investment option are classified as equity on our Consolidated Balance Sheets. We do not recognize marketing expense associated with these instruments as they are freestanding from the other agreements entered into with Shopify and were issued at fair market value. Stock-Based Compensation Compensation expense related to stock-based transactions, including employee, directors, and non-employee awards as well as secondary market transactions, is measured and recognized in the consolidated financial statements based on fair value. Pursuant to our 2015 Plan, we have issued stock options, RSUs, and restricted stock awards (“RSAs”); however, all equity grants issued subsequent to our IPO are made pursuant to our 2023 Stock Option and Incentive Plan (“2023 Plan”), which was approved by our board of directors effective as of September 19, 2023. During the year ended December 31, 2024, stock-based compensation awards issued were in the form of RSUs subject to only service-based vesting conditions under our 2023 Plan. During the year ended December 31, 2023, stock-based compensation awards issued were in the form of RSUs subject to both service-based and performance-based vesting conditions under our 2015 Plan and RSUs subject to only service-based vesting conditions under our 2023 Plan. Stock-based compensation awards that contain only service-based vesting conditions are recognized as expense, on a straight-line basis over the requisite service period, which is generally the vesting period of the respective award. In addition to service requirements, RSUs granted under our 2015 Plan prior to our IPO are subject to a performance-based vesting condition, which we have concluded represents a performance condition. Fair value of such awards is measured on the grant date and recognized over the vesting term when the performance condition is considered probable of being achieved. This performance condition was achieved when our registration statement on Form S-1 filed with the SEC in connection with our IPO became effective on September 19, 2023. Compensation expense for these awards with both service-based and performance-based vesting conditions is expensed under the accelerated attribution method, which includes a cumulative catch up recorded upon the satisfaction of the performance-based vesting condition for services that had been completed as of the satisfaction of the performance-based vesting condition. The remaining expense for these awards is being recognized using the accelerated attribution method over the remaining service period. For option awards granted in prior years, we estimate grant date fair value using the Black-Scholes option pricing model. The grant date fair value of RSUs and RSAs is estimated based on fair value of the underlying common stock. Recent Accounting Pronouncements See Note 2. Summary of Significant Accounting Policies in the notes to our consolidated financial statements included elsewhere in this filing for a discussion about new accounting pronouncements adopted as of the date of this Annual Report on Form 10-K. 79 Table of Contents